Opinion
00 CIV. 5585 (DLC)
August 7, 2001
Bing Li, Esq., Raymond H. Wong, P.C., New York, NY, for Plaintiff.
Chris X. Lin, Esq., Chen, Lin, Li Jiang, LLP, New York, NY, for Defendant.
OPINION AND ORDER
On July 27, 2000, plaintiff Xuchang Rihetai Human Hair Goods Co., Ltd. ("Human Hair"), a Chinese corporation, filed this diversity action against Hanyu International USA Inc. ("Hanyu"), a New York corporation, and Hongjun Sun ("Sun"), a director and shareholder of Hanyu, and her husband, Chuanyu Xie ("Xie"), both of whom are residents of New York State. Following the close of discovery, plaintiff moved for summary judgment. For the following reasons, plaintiff's motion for summary judgment is granted in part.
Whether Xie is a shareholder of Hanyu is disputed. See infra.
Defendants subsequently filed an action against plaintiff in the Eastern District of New York. Defendants have voluntarily
dismissed that action and filed those claims as counterclaims in this action.
BACKGROUND
The following facts are undisputed, unless otherwise noted.
Between December 1998 and July 1999, plaintiff Human Hair and defendant Hanyu entered into negotiations that ultimately resulted in five contracts ("Contracts") for the sale of 60,421 pieces of human hair products ("Hair Products") for a total price of $369,611.90. The Contracts provide that the Hair Products sold by Human Hair to Hanyu are to be "100 percent human hair" and that,
[s]hould the quality, quantity and/or weight be found not in conformity with those stipulated in this Contract . . . the Buyers shall have the right within 30 days after the arrival of the goods at the port of destination, to lodge claims concerning the quality, quantity or weight of the goods.
The Contracts additionally contain arbitration clauses that provide that if disputes "arising from the execution of, or in connection with the contract[s]" cannot be settled through "friendly negotiation," they shall be submitted to the "China International Economic and Trade Arbitration Commission" for final and binding arbitration. Neither party has sought arbitration of the disputes at issue in this case.
In October 1998, Hanyu received and inspected samples of Human Hair's Hair Products and found their quality to be "very good." Human Hair's first three shipments of Hair Products arrived in the United States on or about January 20, March 12, and May 11, 1999, respectively.
Xie cut holes out of some of the boxes in the first and second shipments and Xie and some of Hanyu's customers made a brief visual inspection of the Hair Products contained within.
On February 24, 1999, about one month after the first shipment's arrival, Xie wrote Human Hair that the quality of the first shipment of Hair Products was "very good."
Hanyu began receiving complaints from its customers about the quality of the Hair Products in July 1999. In a letter, dated July 11, 1999, Xie wrote Human Hair to complain for the first time about the quality of the second shipment. When a Human Hair employee called Hanyu and "assured [Hanyu] that there could be nothing wrong with her company's products," Hanyu "decided to wait and see." Between July and September 1999, Hanyu received additional complaints from its customers regarding the quality of the first three shipments of Hair Products. It is undisputed that the Hair Products in the fourth and fifth shipments were of high quality.
Sun asserts that "a significant portion of the first shipment from [Human Hair] were fake, nonhuman hair pieces," and defendants' counterclaims concern the first three shipments, even though Xie did write plaintiff that the first shipment of Hair Products was "very good."
By September 1999, Hanyu had paid a total of $79,930.00 towards the Contracts' total sale price, leaving a balance of $294,671.90. To satisfy the remaining balance, Hanyu issued five negotiable instruments payable to two of Human Hair's exporting agents, but these negotiable instruments were dishonored and, therefore, did not satisfy Hanyu's debt.
The parties executed a written payment agreement ("Payment Agreement") on December 1, 1999, which provides
that [Human Hair] sold to [Hanyu] [60,421] pieces of human hair on five sales contracts. The total price is [$369,611.90]. . . . The said total contract prices, credited by the amount HANYU has paid, and to be further credited by the value of the goods which will be returned . . . will be paid by HANYU. The contract price on the five sales contract [sic] is guaranteed with the real property of SUN HONGJUN and XIE CHUANYU in Qingdao City.
The Payment Agreement included a choice of forum clause selecting Xuchang City for litigation of any disputes. No party has sought to litigate these claims in Xuchang City. Under these circumstances, such a forum selection clause does not "oust the jurisdiction" of this Court. Evolution Online Systems, Inc. v. Koninklijke PTT Nederland N.V., 145 F.3d 505, 510 (2d Cir. 1998).
(Emphasis supplied.) On January 3, 2000, Xie wrote to Human Hair that "more time" was necessary to return the Hair Products to Human Hair because some of the shipments were in the process of being returned from Hanyu's customers, and also because the "current cartons [were] very broken" and plaintiff's and defendants' hair products were "mixed together" in defendants' warehouse. Defendants have neither made additional payments, nor returned any Hair Products to plaintiff.
Plaintiff's verified amended complaint asserts causes of action for: (1) breach of the Contracts; (2) breach of the covenant of good faith and fair dealing; (3) account stated on the Payment Agreement; (4) an action on the five negotiable instruments; and (5) fraudulent inducement. Plaintiff seeks damages of $294,671.90, incidental damages of $68,049.55, attorneys' fees, and $1 million in punitive damages on its fraud claim. Defendants assert counterclaims for: (1) breach of contract due to the nonconformity of the Hair Products; (2) breach of the implied warranty of fitness for a particular purpose; and (3) breach of the implied warranty of merchantability. Defendants seek $400,000 in damages plus costs, expenses, and attorneys' fees.
DISCUSSION
Summary judgment may not be granted unless the submissions of the parties, taken together, "show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Rule 56(c), Fed.R.Civ.P. The substantive law governing the case will identify those issues that are material, and "only disputes over facts that might affect the outcome of the suit under the governing law will properly preclude the entry of summary judgment." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1987). The moving party bears the burden of demonstrating the absence of a material factual question, and in making this determination the Court must view all facts in the light most favorable to the nonmoving party. See Azrielli v. Cohen Law Offices, 21 F.3d 512, 517 (2d Cir. 1994). When the moving party has asserted facts showing that the nonmovant's claims cannot be sustained, the opposing party must "set forth specific facts showing that there is a genuine issue for trial," and cannot rest on the "mere allegations or denials" of his pleadings. Rule 56(e), Fed.R.Civ.P. See also Goenaga v. March of Dimes Birth Defects Found., 51 F.3d 14, 18 (2d Cir. 1995). In deciding whether to grant summary judgment, this Court must, therefore, determine (1) whether a genuine factual dispute exists based on the evidence in the record and (2) whether the facts in dispute are material based on the substantive law at issue.
A federal court sitting in diversity must apply the choice of law rules of the forum state. See Klaxon Co. v. Stentor Elec. Mtg. Co., 313 U.S. 487, 496 (1941). The parties agree that New York law governs this case and have applied New York law in their briefs. Furthermore, "New York applies the law of the state with the most significant interest in the litigation," Lee v. Bankers Trust Company, 166 F.3d 540, 545 (2d Cir. 1999) (citation omitted), and New York is the state with the most significant interest in this dispute: although it is unclear from the evidence submitted where the Contracts were executed, the Hair Products were shipped to New York, and one of the parties is incorporated in New York, see White v. ABCO Engineering Corp., 221 F.3d 293, 301 (2d Cir. 2000). Therefore, New York law governs.
A. Breach of Contract
Plaintiff asserts that it is entitled to summary judgment on its breach of contract claim because defendants accepted the Hair Products in all five shipments and never revoked their acceptance of these goods. Under New York law, the elements of a breach of contract claim are: (1) the existence of an agreement; (2) adequate performance of the contract by the plaintiff; (3) breach of contract by the defendant; and (4) damages. Harsco Corp. v. Segui, 91 F.3d 337, 348 (2d Cir. 1996).
Under the New York Uniform Commercial Code, ("NYUCC"), acceptance of goods occurs when the buyer
(a) after a reasonable opportunity to inspect the goods signifies to the seller that the goods are conforming or that he will take or retain them in spite of their non-conformity; or
(b) fails to make an effective rejection . . . but such acceptance does not occur until the buyer has had a reasonable opportunity to inspect them; or
(c) does any act inconsistent with the seller's ownership; but if such act is wrongful as against the seller it is an acceptance only if it is ratified by him.
NYUCC § 2-606. "Acceptance of a part of any commercial unit is acceptance of that entire unit," id., and "[t]he buyer must pay at the contract rate for any goods accepted." NYUCC § 2-607.
Defendants do not dispute that they accepted and retained all of the Hair Products they received from plaintiff, and did not revoke their acceptance of these Hair Products. Defendants additionally acknowledge that they have returned no Hair Products to plaintiff, as they were entitled to do under the Payment Agreement, and have not paid the $294,671.90 owed to plaintiff under both the Contracts and the Payment Agreement.
Defendants assert, however, that their counterclaims — for breach of contract based on the nonconformity of the Hair Products, breach of the implied warranty of fitness for a particular purpose, and breach of the implied warranty of merchantability on the first three shipments of Hair Products — preclude summary judgment on plaintiff's breach of contract claim. Plaintiff responds that defendants' counterclaims must be dismissed because defendants did not timely notify plaintiff of any nonconformity.
B. Defendants' Counterclaims
Acceptance of non-conforming goods with knowledge of their nonconformity does not preclude "any other remedy . . . for non-conformity." NYUCC § 2-607(2). See also Cliffstar Corp. v. Elmar Industries, Inc., 678 N.Y.S.2d 222, 223 (4th Dep't 1998).
In order for a buyer to recover damages following acceptance of the nonconforming goods, however, "the buyer must within a reasonable time after he discovers or should have discovered any breach notify the seller of breach or be barred from any remedy." NYUCC § 2-607(3)(a). Notification is sufficient if it "alert[s] [defendants] that the transaction [was] troublesome," but need not "include a claim for damages or threat of future litigation." Cliffstar Corp., 678 N.Y.S.2d at 223 (brackets in original). Whether notification is timely is generally a question of fact, id., although parties can contractually fix a time, that is not "manifestly unreasonable," by which a buyer must notify a seller of a breach, NYUCC § 1-204(1).
Under the Contracts, defendants had thirty days from the arrival of a shipment to notify plaintiff of any nonconformity. Each of the first three Contracts provides that
[s]hould the quality, quantity and/or weight be found not in conformity with those stipulated in this Contract . . . the Buyers shall have the right within 30 days after the arrival of the goods at the port of destination, to lodge claims concerning the quality, quantity or weight of the goods.
(Emphasis supplied.) Because the first three shipments arrived in the United States on or about January 20, March 12, and May 11, 1999, defendants had until February 19, March 11, and June 10, 1999, respectively, to notify plaintiff of any nonconformity.
Hanyu did not complain to Human Hair regarding the quality of the Hair Products, however, until July 1999, two months after receipt of the third shipment. Accordingly, defendants did not timely notify plaintiff of non-conforming Hair Products in the first three shipments.
Despite deposition testimony that Hanyu first complained to Human Hair regarding the quality of the shipments in July 1999, in a June 1, 2001 affidavit Sun asserts that Hanyu first notified plaintiff orally in June 1999. Sun's affidavit does not create a triable issue of fact regarding the timeliness of defendants' notification. Palazzo v. Corio, 232 F.3d 38, 43 (2d Cir. 2000).
Defendants additionally assert that the defects in the Hair Products were latent and, therefore, were not discoverable within the thirty-day period. The contractually stipulated thirty-day notification period must be enforced, however, unless it is "unconscionable." Wilson Trading Corp. v. David Ferguson, Ltd., 297 N.Y.S.2d 108, 112 (N.Y. 1968). Whether a contract's terms are unconscionable is a matter of law to be determined in light of "the background of the contract's commercial setting, purpose, and effect." Id. This issue does not bar entry of summary judgment. Id. If defects are latent, only "a reasonable contractual provision as to the time for inspection and presentment of claims" will be enforced. Coolite Corp. v. American Cyanamid Co., 384 N.Y.S.2d 808, 811 (1st Dep't 1976).
Whether the defects in the Hair Products were latent is disputed. Even if the defects were latent, however, the thirty-day period provided for notification by the Contracts was reasonable given defendants' experience in the hair products' business and their knowledge of plaintiff's business practices. Defendants were experienced in the sale of hair products and knowledgeable about human hair products at the time they received the first shipment from the plaintiff. Sun has been involved in the sale and marketing of hair products since at least 1997, and Xie has been involved in the hair products business since 1998. Xie and Sun entered the human hair business together in 1998.
Thus, each of the defendants had experience judging the quality of hair products prior to their receipt of the first three shipments of Hair Products. Moreover, defendants knew that plaintiff had sold poor quality hair products to another business before defendants ordered their second shipment from plaintiff.
In light of the undisputed evidence, including defendants' experience in the human hair business and defendants' knowledge that the Hair Products they received from plaintiff might be of poor quality, thirty days was not, as a matter of law, an unreasonable amount of time for defendants to report non-conforming Hair Products to plaintiff. Defendants' explanation for the delay in reporting the Hair Products' defects — that "most of the first shipment from [Human Hair] sold well . . . [and] [i]t took Hanyu sometime [sic] to get [the second and third shipments] to its customers" — is an insufficient basis to disturb the thirty-day period provided for notification in the Contracts. Consequently, defendants' failure to notify plaintiff within thirty days of the arrival of any of the first three shipments of any nonconformity requires entry of summary judgment in plaintiff's favor on defendants' counterclaims. Walbern Press, Inc. v. C.V. Communications Inc., 622 N.Y.S.2d 951, 952 (1st Dep't 1995). Plaintiff's motion for summary judgment on its breach of contract claim is granted.
C. Breach of Covenant of Good Faith and Fair Dealing
Plaintiff additionally seeks summary judgment on its claim that defendants breached the covenant of good faith and fair dealing. Under New York law, all contracts include an implied covenant of good faith and fair dealing that "includes an implied undertaking on the part of each party that he will not intentionally and purposely do anything to prevent the other party from carrying out the agreement on his part." Kader v. Paper Software, Inc., 111 F.3d 337, 342 (2d Cir. 1997) (citations omitted) (emphasis in original). A claim for breach of the implied covenant will be dismissed, however, "as redundant where the conduct allegedly violating the implied covenant is also the predicate for breach of covenant of an express provision of the underlying contract." ICD Holdings V. Frankel, 976 F. Supp. 234, 243-44 (S.D.N.Y. 1997) (citation omitted). See also Gencor Ind., Inc. v. Ingersoll-rand Co., No. 99 Civ. 9225 (TPG), 2000 WL 1876651, at *9 (S.D.N.Y. Dec. 22, 2000); EUA Cogenex Corp. v. North Rockland Cent. School Dist., 124 F. Supp.2d 861, 873 (S.D.N.Y. 2000); D'Accord Financial Servs., Inc. v. Metsa-Serla Oy, No, 98 Civ. 5847 (DLC), 1999 WL 58916, at *2 (S.D.N.Y. Feb. 8, 1999). Plaintiff asserts that defendants breached the covenant of good faith and fair dealing "by injuring the rights of the plaintiff in receiving the fruits of the contracts."
Plaintiff's breach of covenant claim is dismissed as redundant.
D. Account Stated and Action on Negotiable Instruments
Plaintiff additionally seeks summary judgment on its claims for account stated and on the negotiable instruments. "The existence of a valid and enforceable written contract governing a particular subject matter ordinarily precludes recovery in quasi contract for events arising out of the same subject matter." Clark-Fitzpatrick v. Long Is. R.R. Co., 521 N.Y.S.2d 652, 656 (N.Y. 1987). See also Sagegroup Associates, Inc. v. Dominion Textile (USA), Inc., 665 N.Y.S.2d 407, 408 (1st Dep't 1997).
Because there is no dispute that valid contracts govern the parties' obligations to each other, recovery through plaintiff's quasi-contractual causes of action — for account stated and on the negotiable instruments — is precluded. Accordingly, plaintiff's motion for summary judgment on these claims is denied, and in light of the grant of summary judgment on the breach of contract claim, these causes of action are dismissed.
E. Fraudulent Inducement
Plaintiff additionally seeks summary judgment on its claim that defendants fraudulently induced plaintiff to believe that defendants were financially able to meet their obligations under the Contracts. Under New York law, the elements of fraudulent inducement are: (1) a knowingly false representation of a material fact; and (2) detrimental reliance thereon. See National Union Fire Ins. Co. v. Worley, 690 N.Y.S.2d 57, 61 (1st Dep't 1999). Where a fraud claim is brought alongside a breach of contract claim, the plaintiff must distinguish the two by (1) demonstrating a legal duty separate from the duty to perform under the contract, (2) demonstrating a fraudulent misrepresentation collateral or extraneous to the contract, or (3) seeking special damages caused by the misrepresentation and unrecoverable as contract damages. Bridgestone/Firestone, Inc. v. Recovery Credit Services, Inc., 98 F.3d 13, 20 (2d Cir. 1996).
In support of its fraudulent inducement claim, plaintiff relies primarily upon a letter from Sun to plaintiff, dated September 18, 1998, before the Contracts were executed, in which Sun misrepresented Hanyu's monthly sales volume and Sun and Xie's financial stability. In that letter, Sun wrote:
Here is our situation: our company has established [sic] in the U.S. for three years. But the human hair business is not so good. It improves a little this year. Now the monthly sales is about $200,000. I put my house as a mortgage to raise capital for the company. The bank has approved, and the process is underway. I placed four orders from China in September. Two of them has [sic] arrived. The other two were being manufactured (one is done). I promised to pay them using my bank loan. Therefore I request to pay you when the merchandise arrives in the U.S. I wonder if you will agree (I can pay you here or pay you in China). Another issue is, I don't know when your merchandise will be ready, when they will be shipped. (The reason I want to know these [sic] is to get the payments ready, and to eliminate any trouble in raising capital.)
The certified translation of this letter is signed "Sun Hong Jun," though Sun, in her declaration, asserts that this letter was written by Xie.
Plaintiff additionally relies on Xie's misrepresentation to Human Hair that he owned a restaurant in China that could be used as collateral or security, and the fact that Hanyu's bank account's balance was $5,909.57 on December 31, 1998. Sun acknowledges that Hanyu did not have a monthly sales volume of $200,000, but asserts that the $200,000 figure was a rough estimate of the total amount of Hanyu's other business ventures. Sun acknowledges that Sun and Xie did not own a restaurant in China, but maintains that defendants had, indeed, mortgaged their home to pay their suppliers, and had intended to use a restaurant business in China as collateral or security. Sun additionally asserts that Xie repeatedly informed Human Hair of Hanyu's financial difficulties.
Sun asserts that Hanyu has a business in "documentary sales," meaning "selling the documents of title, i.e. bills of lading to purchasers in the United States."
Defendants assert that plaintiff has failed to assert a legal duty independent of Hanyu's contractual obligations to Human Hair, a promise collateral to its contractual promise, or special damages. Although "[t]he failure to fulfill a promise to perform future acts is not ground for a fraud action unless there existed an intent not to perform at the time the promise was made . . . a relatively concrete representation as to a company's future performance, if made at a time when the speaker knows that the represented level of performance cannot be achieved, may ground a claim of fraud." Cohen v. Koenig, 25 F.3d 1168, 1172 (2d Cir. 1994). Defendants' representations about their ability to perform their obligations under the Contracts do constitute promises collateral to the promise to perform under the Contracts and are, therefore, sufficient to distinguish plaintiff's contract claim from its fraud claim.
It is, however, appropriate to deny plaintiff's motion for summary judgment on its fraudulent inducement claim. In the first instance, plaintiff has submitted no evidence that Sun's misrepresentations regarding Hanyu's monthly sales volume or Sun's and Xie's assets when entering into the Contracts were material or reasonably relied upon. In addition, whether all of the statements at issue constitute misrepresentations and whether any misrepresentations were knowing are disputed issues of fact that cannot be resolved on summary judgment. Plaintiff's motion for summary judgment on its fraudulent inducement claim is, therefore, denied.
F. Damages
Plaintiff is entitled to recover $294,671.90, the outstanding balance owed on the Contracts and the Payment Agreement. Plaintiff has additionally moved for about $68,049.55 in incidental damages resulting from defendants' breach, based upon a $48,049.55 loss resulting from plaintiff's inability to collect a thirteen percent tax refund on the Contracts' price, and "about $22,000.00" in travel and accommodation expenses incurred when plaintiff's "representatives" met with defendants' "negotiating committee" in December 1999 and April 2000.
Plaintiff is entitled to incidental damages resulting from the defendants' breach, including "any commercially reasonable charges, expenses or commissions incurred in stopping delivery, in the transportation, care and custody of goods after the buyer's breach, in connection with return or resale of the goods or otherwise resulting from the breach." NYUCC § 2-710. A plaintiff is, however, "entitled to recover only for such incidental damages as flow directly from, and are the probable and natural result of, the breach." Kasem v. Philip Morris, 664 N.Y.S.2d 469, 470 (2d Dep't 1997).
Plaintiff's 56.1 Statement does not point to evidence in the record that supports a claim for incidental damages. Local Rule 56.1 provides, in part, that:
Upon any motion for summary judgment pursuant to Rule 56 of the Federal Rules of Civil Procedure, there shall be annexed to the notice of motion a separate, short and concise statement of the material facts as to which the moving party contends there is no genuine issue to be tried. Failure to submit such a statement may constitute grounds for denial of the motion.
"The purpose of Local Rule 56.1 is to streamline the consideration of summary judgment motions by freeing district courts from the need to hunt through voluminous records without guidance from the parties." Holtz v. Rockefeller Co., 2001 WL 834023, at *6 (2d Cir. July 10, 2001). Although this Court can "conduct an assiduous review of the record in an effort to weigh the propriety of granting a summary judgment motion, it is not required to consider what the parties fail to point out." Monahan v. New York City Department of Corrections, 214 F.3d 275, 292 (2d Cir. 2000). It is, therefore, appropriate to deny plaintiff's claim for incidental damages because plaintiff has not pointed to any evidence in the record supporting this claim in its Local 56.1 Statement. The defendants' failure to address the claim for incidental damages in their Rule 56.1 Counter-Statement can be attributed to the plaintiff's failure to address the issue in its own 56.1 Statement.
Moreover, even reviewing the record, the Court has found no admissible evidence in support of its claim for incidental damages. The sole support for plaintiff's incidental damages claim appears to be the conclusory assertions in Human Hair's executive vice president's affirmation. Assuming that plaintiff could recover the incidental damages it seeks, plaintiff has submitted no admissible evidence regarding the cost of the travel and accommodation expenses plaintiff incurred as a result of defendants' contractual breach, the existence of a Xuchang City export sales tax, or the amount of the export sales tax plaintiff was unable to recover as a result of defendants' breach.
Plaintiff's motion for incidental damages is denied.
Plaintiff's motion to recover its attorneys' fees must also be denied. Under New York law, "the intent to provide for counsel fees as damages for breach of contract must be unmistakably clear in the language of the contract." Bridgestone/Firestone, 98 F.3d at 20-21 (citation omitted). Neither the Contracts nor the Payment Agreement include any provision for attorneys' fees for the prevailing party in the event of a dispute.
G. Piercing the Corporate Veil
Plaintiff's request that the Court pierce the corporate veil and hold the individual defendants jointly and severally liable is also denied. In order to pierce the corporate veil of Hanyu and hold Xie and Sun individually liable, this Court must find that: (1) Xie and Sun "exercised domination and control" over Hanyu; and (2) "this control was used to cause a wrong" to Human Hair. Bedford Affiliates v. Sills, 156 F.3d 416, 431 (2d Cir. 1998). See also Thrift Drug, Inc. v. Universal Prescription Administrators, 131 F.3d 95, 98 (2d Cir. 1997). Facts that tend to show the domination of a corporation include:
(1) the absence of the formalities and paraphernalia that are part and parcel of the corporate existence, i.e., issuance of stock, election of directors, keeping of corporate records and the like, (2) inadequate capitalization, (3) whether funds are put in and taken out of the corporation for personal rather than corporate purposes, (4) overlap in ownership, officers, directors, and personnel, (5) common office space, address and telephone numbers of corporate entities, (6) the amount of business discretion displayed by the allegedly dominated corporation, (7) whether the related [entities] deal with the dominated corporation at arms length, (8) whether the corporations are treated as independent profit centers, (9) the payment or guarantee of debts of the dominated corporation by other corporations in the group, and (10) whether the corporation in question had property that was used by [another] as if it were its own.
W.M. Passalacqua Builders v. Resnick Developers, 933 F.2d 131, 139 (2d Cir. 1991). See also American Fuel Corp. v. Utah Energy Development Co., 122 F.3d 130, 134 (2d Cir. 1997); Mars Electronics of NY, Inc. v. USA Direct, Inc., 28 F. Supp.2d 91, 97-98 (E.D.N.Y. 1998) (applying ten-prong test when piercing the veil to hold individual liable). Using domination to commit fraud has been interpreted to require a showing that "the owners, through their domination, abused the privilege of doing business in the corporate form to perpetrate a wrong or injustice against that party such that a court in equity will intervene." Thrift Drug, 131 F.3d at 97.
The plaintiff has offered evidence that Hanyu may be dominated by Sun, and, possibly, Xie. Hanyu does not observe corporate formalities: it has no board of directors, has never held shareholder meetings, and has declared no dividends. In addition, Hanyu's debts to Human Hair were guaranteed by Xie's and Sun's property in China in the Payment Agreement. Whether or not the evidence submitted by plaintiff would be sufficient to establish Hanyu's domination and control by Sun and/or Xie, however, plaintiff has offered no evidence to support its assertion that Xie and Sun used their control over Hanyu to perpetrate any fraud or wrong that resulted in plaintiff's loss.
The extent of Xie's involvement in Hanyu is contested. Sun asserts that she is the only shareholder of Hanyu. Xie asserts that he owns 49% of the shares. Sun asserts that she makes all of the business decisions for Hanyu. Xie asserts that he has "the right to make decisions" about "the business operation of the company," but is not the "legal representative" of Hanyu.
Plaintiff additionally asserts in its 56.1 Statement that the State Secretary of New York's public records are out of date and that Hanyu has never filed a biennial statement, but has provided no evidence in support of these assertions.
Plaintiff argues that Xie and Sun used Hanyu to "fraudulently induc[e] the plaintiff to enter into five sales contracts and by fraudulently issuing five drafts without the intent to honor the same upon presentation." Defendants' alleged fraudulent inducement of plaintiff does not establish, however, that defendants used their domination of Hanyu to commit a fraud on plaintiff. The evidence put forth by plaintiff shows at most that Hanyu was undercapitalized, which is an insufficient basis, without other evidence of wrongdoing, to pierce the corporate veil under New York law. For example, when undercapitalization is combined with the personal use of corporate funds such that the corporation is deprived of the assets necessary to pay its debts, then it is appropriate to pierce the corporate veil. Austin Powder Co. v. MuCullough, 628 N.Y.S.2d 855, 856 (4th Dep't 2001). See also Brito v. DILP Corp., 7243 N.Y.S.2d 459, 460 (1st Dep't 2001). Plaintiff does assert, in its Rule 56.1 Statement, that Hanyu paid for Xie and Sun's "daily expenditures." The portion of Xie's deposition cited in plaintiff's Rule 56.1 Statement is too garbled, however, to constitute proof that Xie and Sun were personally using corporate funds. Accordingly, plaintiff's motion to pierce the corporate veil and hold Xie and Sun jointly and severally liable is denied.
The portion of Xie's deposition cited in support of plaintiff's claim that Hanyu pays for Xie and Sun's daily expenditures is as follows:
Q: Was there any occasion where Hanyu made any payments for you, yourself, for your wife or for your household necessities?
A: Eventually because the company has been suffering losses. Our normal daily expenditures and we also went to the flea market.
Mr. Lin: I don't think he understood.
A: We learn from the mark.
CONCLUSION
For the aforementioned reasons, plaintiff's motion for summary judgment on its breach of contract claim in the amount of $274,671.90 is granted, and plaintiff's motion for summary judgment dismissing defendants' counterclaims is granted.
Plaintiff's claims for breach of the covenant of good faith and fair dealing, account stated, and its action on negotiable instruments are dismissed. Plaintiff's motions for summary judgment on its fraudulent inducement claim, and for incidental damages, punitive damages, and attorneys' fees are denied.
A scheduling order is issued with this Opinion and Order.
SO ORDERED: